For investors seeking that combination of income and upside potential, real estate investment trusts (REITs) remain a sector worth exploring. REITs, which operate through the ownership, management, and leasing of various types of real properties and mortgage investments, receive favorable tax treatment in exchange for distributing a significant portion of their taxable income to shareholders – and dividends are frequently used to comply with those rules.
That brings us to mortgage REITs, or mREITs, which invest primarily in mortgage-related assets rather than physical properties. The group has faced significant headwinds in recent years as higher interest rates and weakness in commercial real estate have weighed on sentiment. However, those same pressures may have created an opportunity. As conditions begin to stabilize and valuations remain depressed, some analysts see the potential for both attractive income and meaningful capital appreciation.
Among them is top BTIG analyst Douglas Harter, who believes the risk-reward setup in select mREITs is becoming compelling.
“The residential credit-focused mREITs offer a more discounted valuation than the Agency-focused, plus more book value upside potential over time. We expect book values to be relatively stable and see the current valuation discount being a result of lower relative ROEs/dividend yields (partially as a result of higher operating costs acting as a drag) vs. concerns with the asset quality,” says Harter, who is ranked among the top 4% of Wall Street analysts.
